Bell Curve?

ACStudio,

You wrote in a recent post:

I have found no data that leads me to believe that any chart setups, patterns, technicals, fundamentals, coin flipping, reading of entrails, gypsy consultations or guru recommendations provide any more edge than one would expect from a normal bell curve distribution of success and failure. However I would suggest that one should use whatever appeals to them to get them engaged and THEN use probability based strategies to provide the edge needed to increase your chance of success.

While I understand your premise, I can't quite get all the way to "normal bell curve", which suggests that there is an equal chance of a stock moving up by one standard deviation as moving down by the same amount.

For example, suppose a stock is in a trading range, and has shown a persistent reluctance to go above 70 or below 50. If the stock falls to 50 with a hammer candle at support, while stochastics goes below 20. The stock then starts back up with a big white candle, and stochastic goes above 30 and MACD turns positive, etc... do you think at that moment, the stock has just as much of a chance to move up 1SD to 65 or down 1 SD to 35?

Again, I get your premise, that TA doesn't offer much beyond randomness, and I'll agree at times, but there are times when I have to throw the normal bell curve out the window.

Thoughts?

I've seen no evidence that would lead me to think otherwise. If the stock is trading at 50 (which it wouldn't be if it just "then starts back up with a big white candle,") and the expected 1 standard deviation move for the next expiration was 15$ (35-65) then the volatility must be insane at that moment. I may take a directional bias based on that pattern, or a coin flip or whatever. But I would not just buy the stock or option at that point. If I thought it was oversold and ready to move up I personally would use a defined risk strategy by selling an out of the money put spread for credit. Now I can be wrong about direction all the way down to the short strike price minus credit received and still not lose money.

To me whatever you use to make a directional assumption is irrelevant as, if any of them worked with any consistency, someone or everyone with more money than me would have already taken advantage of it.

It isn't important what you think the stock will do....what's important is how the options are priced. If it seems absolutely ludicrous to you that the stock might drop to 35$ by next expiration...but the options are priced with that being the 1 standard deviation move to the downside then why wouldn't you sell the 35 puts until your hands bleed and sleep like a baby with a 84% probability of not losing money.....or better, if in fact your assumptions have merit. As opposed to buying the stock and maybe you are right....maybe not....maybe you're a little bit right for a little while then really wrong for a long time. You have no way of calculating the possible magnitude or longevity of the correctness or lack thereof.